* Parvus says built 3.7 percent stake in G4S
* Will vote against deal to buy ISS at AGM
* Says other investors are also unhappy
By Victoria Howley and Sophie Sassard
LONDON, Oct 20 (Reuters) - Parvus Asset Management, the fifth-largest shareholder in British security firm G4S Plc , on Thursday led hostility to the company's 5.2 billion pound ($8.2 billion) deal to buy ISS, calling it "an untested vision" that it would not support.
G4S said on Monday it would buy Danish support services company ISS.
Parvus took ownership on Wednesday of a 3.7 percent stake in G4S, the world's biggest security company, after swapping out of contracts for difference, the firm's founder and portfolio manager Edoardo Mercadante told Reuters. The fund began to build its position on April 15, 2010.
According to Thomson Reuters data, the stake would make Parvus the fifth-largest investor in G4S ahead of Scottish Widows and Templeton Investment.
A spokesman for G4S confirmed that Parvus had built a stake of at least 3.4 percent, but declined to comment further.
"The (ISS) deal does not make sense strategically, operationally or financially and we intend to vote against it," said Mercadante, who said he had spoken to other investors that were also unhappy.
"G4S has only ever done integrated services in Britain, yet it wants to double its size with a facilities management deal abroad. The vision is untested and too risky."
G4S is doubling its equity base in an opportunistic acquisition of ISS that will continue its development into an international facilities management company and away from its security services roots.
The company had indicated previously that it would retain its focus on small bolt-on deals in the emerging markets, where it said it wanted to focus 50 percent of its activities by 2019.
A second top 20 G4S shareholder, speaking on condition of anonymity, said: "The deal is to our mind an absurd deal, it is totally unnecessary. People liked G4S for what it was, a business which was easy to understand, a simple business with good growth prospects (and) good profitability."
Meanwhile, the transaction attracted other hedge funds' attention.
Short-selling interest in G4S has spiked since the proposed acquisition was announced on Monday, with the volume of shares outstanding on loan rising to 2.07 percent by close of business on Wednesday, compared with 0.93 percent on Oct. 12, figures from Data Explorers show.
While some speculators were betting on further share price falls, one London-based fund manager said a few hedge funds were betting on rapid gains if the deal was pulled.
The fund manager described Parvus as "very aggressive" but poured cold water on the prospect of a bigger scale coordinated activism from shareholders.
"The deal is not horrible. G4S is paying a moderate price and there are a few synergies. The companies will share the same customers' base."
"It was the same when Rentokil first diversified its business by acquiring SecurityGuard. Shareholders were confused, they never knew which leg of the business was profitable or not," the fund manager added.
According to Panmure analyst Michael Allen, although the deal makes sense financially, it raises concerns over the quality of future earnings.
"With debt levels also above average the market is likely to ascribe a discount valuation on the shares for some time until evidence emerges that integration is going to plan."
The company's stock fell 22 percent after the deal to buy ISS was announced on Monday, helped by a $3.2 billion rights issue that will dilute existing shareholders.
By 1623 GMT, the stock was ahead 3.2 percent at 223 pence.
G4S shareholders will vote on the acquisition and rights issue at a general meeting on Nov. 2.
ISS, owned by Swedish private equity firm EQT and Goldman Sachs Capital Partners since 2005, provides services from cleaning to catering and employs more than half a million workers worldwide.
G4S proposed the acquisition because it says the support services market is increasingly demanding a one-stop shop approach from suppliers that are able to offer a large bundle of services under one contract.